When Haruhiko Kuroda resigned from his post as Bank of Japan governor in April this year, he laid the groundwork for his successor, Kazuo Ueda, to try and make a change on the policy front. His departing words were that „Japan has made steady progress towards achieving its 2% inflation target“.

While those words are now commonplace, they were not for many years as the Japanese economy battled against deflation. And when Kuroda made such comments, it got markets excited into thinking that change is afoot at the Bank of Japan.

But as we have come to know about Ueda’s tenure so far, it has been nothing but disappointment for yen bulls in each and every important juncture this year. That saw USD/JPY rally all the way from 130 to 150, also helped out by soaring Treasury yields at the time.

It wasn’t only until the turn to November that saw the pair start to fall back alongside bond yields, as traders also start to build up anticipation and expectation for an imminent policy shift by the Bank of Japan in the near future.

Right now, Japanese officials have guided markets to the spring wage negotiations in March and April next year to be that key turning point. The question is, will they actually end up delivering on that? Or will Ueda & co. end up being overly cautious in slow rolling the pivot away from ultra easy monetary policy?

I want to say that they will ultimately push for a change but at the same time, their credibility in doing so is perhaps being put on the line in a race against time as well. So, it’s not going to be as straightforward as it looks.

That will make it extremely tricky to navigate the Japanese yen and for traders, there could be potential squeezes and unwinding in positions depending on how the Bank of Japan outlook develops.

For this year, it has been easy to stay long in yen pairs and USD/JPY in particular amid the positive carry. But for yen bulls, it is a painful exercise to hold such a heavy negative carry and to stick in such a position for an extended period. And until the Bank of Japan truly pivots from negative interest rates, it could end up still being the case for those optimistic on the yen currency in the early stages of next year.

It’s all about the timing as they say and what may really deliver a blow to yen bulls would be another disappointment by Japanese officials, even after a strong result from the spring wage negotiations.

I wouldn’t put it past the Bank of Japan to ultimately deliver a shift later on, even if they did not do so in March and April. But such a scenario will just add to the likely volatile and uncertainty that will surround the currency in just the first half of next year.

This article was written by Justin Low at www.forexlive.com.

• China’s November Industrial Profits rebound with 29.5% y/y Growth
• Goldman Sachs forecasting US inflation falling to low 2% y/y by US spring time
• Goldman Sachs‘ view on China for the year ahead is not confidence inspiring
• USD/JPY jumped after the BOJ December minutes showed no urgency on a pivot
• The BOJ December meeting summary is not suggestive of any urgent pivot
• Ex-Fed Dallas head Kaplan expects FOMC to lower rates soon, to avoid a flip side mistake
• US stocks off to a positive start for the trading week
• BOJ Gov Ueda said we’re not there yet, prospect of achieving price target not high enough
• U.S. Treasury sells 2-year notes at a high yield of 4.314%

USD/JPY
moved from 142.40 up to just above 142.80 after the Bank of Japan
published its ‘Summary’ of the December meeting. The“Summary
of Opinions“ serves as a record of the discussion and views of
the Policy Board members on economic, financial, and of course policy
issues. The full Minutes of the meeting will be published on January
26 but the briefer Summary today indicated the Bank is not pressing
ahead with removing YCC nor raising short term rates from their
negative level any time soon. The next policy meeting is January 22
and 23.

Elsewhere
across the majors we had minor moves only.

From China we had data on November industrial profits. These rose sharply in November from October, up almost 30% y/y. More in the bullet point above.

USD/JPY has since subsided back to where it started:

This article was written by Eamonn Sheridan at www.forexlive.com.

Industrial profits data for China in November 2023 has been released:

• +29.5% y/y for the month, up sharply from October’s +2.7% y/y and its fourth consecutive month of growth
• and -4.4% YTD y/y (i.e. January – November y/y), from January – October’s reading of -7.8% y/y

So, weaker profits over the first 11 months of this year compared with the same period in 2022, but the November alone month up nearly 30% is encouraging.

China is dealing with weakening demand with its stumbling recovery from lockdowns.

—

Industrial profit numbers cover firms with annual revenues
of at least 20 million yuan ($2.80 million) from their main
operations.

This article was written by Eamonn Sheridan at www.forexlive.com.

The last two months of the year have featured some aggressive moves by traders in pricing in rate cuts for major central banks going into next year. The narrative is one that says traders are convinced by the disinflation trend and that policymakers can start to lower rates as the battle is already won.

Whether or not that will be the case remains to be seen but markets are led by the data and so far, there is not much reason to turn the other cheek. So, what’s priced in now for major central banks that are leaning towards interest rate cuts next year?

• Federal Reserve: -156 bps (first -25 bps in March)
• European Central Bank: -161 bps (first -25 bps in April)
• Bank of England: -141 bps (first -25 bps in May)
• Swiss National Bank: -86 bps (first -25 bps in June)
• Bank of Canada: -120 bps (first -25 bps in April)
• Reserve Bank of Australia: -53 bps (first -25 bps in June)
• Reserve Bank of New Zealand: -93 bps (first -25 bps in May)

That is some rather heavy posturing, especially when it comes to the Fed, ECB, and BOE in particular.

It is important to understand what is priced in as per the above as that sets out the market expectations at the moment going into next year. And therein lies the risk of any potential correction/retracement in pricing if inflation data does not corroborate with what traders are seeing in the first few months of 2024.

This article was written by Justin Low at www.forexlive.com.

Year after year, it bears repeating that January is seasonally the best month for gold. It is just one of those things in markets and more often than not, that trend delivers as it should. But will it do so again this time around?

I touched on that two weeks ago here in relation to a bit of a technical setback in gold at the time. But since then, gold has rallied back to sit higher in December trading, recovering from around $1,975 to around $2,050 currently. However, the key resistance from the 2020 high at roughly $2,075 continues to hold on the daily, weekly and monthly charts, and that remains the critical level to watch heading into next year.

Normally, I’d like to think that gold can bank on this seasonal tailwind 9 times out of 10. But considering the technical situation above, it’s not necessarily a given that gold will be able to shine in January trading once more. That is because if gold is to advance further, it has to pass the test of breaking the key resistance level outlined above. And that means gold needs to push up to close at record levels.

The rally in gold since November also comes on the back of a softer dollar and sliding bond yields, with the latter being a key driver in particular. That comes as the rates market steps up pricing for central bank rate cuts for next year.

The question for gold now is, will traders front run those expectations further and manifest that in the form of a technical break in January? Or will such a break require validation from the rates market?

It’s certainly an interesting one and may act as one of the first few litmus tests in gauging the market’s appetite on the central bank outlook to kick start 2024 trading.

This article was written by Justin Low at www.forexlive.com.

The long-awaited pivot by the Fed finally came in the final FOMC meeting for the year. And that sets up the stage for other major central banks to also follow suit starting next year, unless you’re the Bank of Japan of course. 2023 has been a year dominated by the outlook for major central banks and 2024 will be no different in that regard.

The only thing now is that we’re no longer talking about rate hikes but rate cuts instead. Traders have over the last two months, moved to aggressively price in rate cuts for most major central banks and that sets the backdrop heading into the new year.

It will be a push and pull between the current market pricing and any central bank pushback in the months ahead. All that before the likelihood of central banks conforming to market expectations and then slowly guiding rates back lower, as the disinflation process looks to gather pace in the year ahead.

Given such a predicament, the bond markets i.e. rates will continue to be a pivotal spot to watch – just as it had been this year. The real debate now in Q1 2024, is whether or not traders have it right to price in rate cuts as early as March to May for the likes of the Fed, ECB, and BOE in particular.

And if not, will that stem from a pushback from policymakers or more stubborn inflation data? And how much of a reversal or squeeze will we see to the recent sell the dollar, buy everything else move in markets?

On the flip side, if central banks start agreeing to traders‘ pricing, is there room for a further extension to the recent moves? Plenty of questions but only time will tell.

This article was written by Justin Low at www.forexlive.com.

It is a holiday-stricken week in markets and even with it being a busier December than usual this year, the final trading week of the year should be a quiet one with little to work with in general. There’s not much use trying to pinpoint anything to be a factor during this time as flows are thin across all asset classes.

This is more of a period to reflect back on things and get yourself prepared for the new year. So, even with there being some expiries on the board for later this week, don’t be too fussed about it. Liquidity conditions are thin so that is the more pertinent factor at play for the next few days.

For more information on how to use this data, you may refer to this post here.

I’d like to wish everyone a Merry Christmas and happy holidays! Have a wonderful festive period and rest up well for 2024. 🙂

This article was written by Justin Low at www.forexlive.com.

• We cannot pre-set timing of future policy change
• But would like to make appropriate decision while scrutinising economic developments
• In an economy where positive inflation is sustained, nominal rates will be high
• Will patiently maintain monetary easing to ensure that conditions are right for such cycle to be sustained

Once again, all of this just points towards the fact that they are pushing all the anticipation and attention to next year’s spring wage negotiations. The question then will be, can the BOJ follow through to normalise policy?

This article was written by Justin Low at www.forexlive.com.

I was expecting something quieter last week but it was busy and volatile all week. Stats agencies tend to rush out December releases so they don’t have to release as much between Christmas and New Years.

For Monday, all major western markets are closed but the FX market is open as always.

The lone releases on the calendar are from Japan, which will release November unemployment data.

Merry Christmas.

This article was written by Adam Button at www.forexlive.com.

In a recent push of back-channel diplomacy, Russian President Vlad Putin has been sending a message: He is ready to make a deal for a Ukraine ceasefire. The New York Times made the report yesterday, saying that he’s been signaling through intermediaries since at least Sept that he is open to a cease-fire that freeze the fighting along the current lines.

They cite „two former senior Russian officials close to the Kremlin and American and international officials“ who have received the message.

The report also says that some American officials say it could be a Kremlin attempt at
misdirection and a Kremlin official said the reporting is incorrect. One timeline to be aware of is the March Russian election, as Putin may want a deal beforehand.

Whenever I see a report like this, I wonder who leaked it and why. The days of real ‚journalism‘ of long over and anything like this is planted by someone, for some reason. After reading this report, I wonder if a message is being sent to Kyiv.

This article was written by Adam Button at www.forexlive.com.